There are numerous ways in the UK to make your money work for you. We took a look at one example – this is premium bonds explained.
Premium Bonds Explained – Overview
Premium Bonds are a savings product offered by the UK government in which the bonds are entered into a monthly prize draw for tax-free cash prizes instead of paying interest. The bonds are considered low-risk as the principal investment is guaranteed and held by the government.
Purchasing Them
They are bought with a minimum of £25 and a maximum of £50,000 per person. Instead of paying interest, the bonds enter a monthly prize draw for tax-free cash prizes. The prize amount ranges from £25 to £1 million. The government-run National Savings and Investments (NS&I) manages the premium bonds and conducts the prize draw.
Premium Bonds are the UK’s biggest savings product, with more than 22 million people saving over £119 BILLION in them. But with other savings rates beating Premium Bonds, should you still be buying them?
The Process – Premium Bonds Explained
The NS&I website is the most convenient way to do it.
For one-time purchases and monthly standing orders, the minimum purchase quantity is £25.
You can hold a maximum of £50,000.
Age restriction: You must be at least 16 years old to purchase them; anyone younger than that may hold them in their name.
Generally, the bonds must be held for a full month in order to be eligible to win. So long as bonds are purchased in June, they will be eligible for the August drawing. The optimal time to transfer funds from other savings accounts is during the last week of the month, as this minimises the amount of time the funds are not generating interest or eligible for Premium Bond draws.
Tax Free Prizes
Tax-free payments are made for Premium Bond awards (the interest). That’s no longer a plus, though, for a lot of individuals.
Since 2016, all savings interest has been automatically paid tax-free thanks to the personal savings allowance (PSA). If you are a basic 20% rate taxpayer earning more than £1,000 in interest annually, a higher 40% rate taxpayer earning more than £500 in interest annually, or a top 45% rate taxpayer, you only need to pay tax on it.
A basic-rate payer would need almost £35,000 in savings to earn that at the current top easy-access rate; therefore, if you had less, Premium Bonds do not provide a tax benefit.
The Future – Changes
Beginning the following month, more Premium Bond awards will be won, raising the prize fund rate to its highest level in 14 years.
According to the Treasury-owned operator NS&I, additional prizes worth £50 to £100,000 will be offered, although the overall odds of winning remain the same. It represents the general improvement in savings rates during a time of fierce provider rivalry.
The peak in savings rates, according to analysts, is near. The Bank of England may slow the rate at which interest rates are raised if inflation, which measures the growth in living expenses, slows. That would then cause the increasing rewards for savers to slow down or stop.
